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Predicting Inflation: Does The Quantity Theory Help?

  • Lance J. Bachmeier
  • Norman R. Swanson

Various inflation forecasting models are compared for the period 1979--2003 using a simulated out-of-sample forecasting framework. Our findings are (1) M2 has marginal predictive content for inflation; (2) it is necessary to allow for the possibility that money, prices, and output are cointegrated; and (3) cointegration vector parameter estimation error is important when making out-of-sample forecasts. Consistent with previous work, we find a structural break in the early 1990s, but the break was easily detected and would not have affected out-of-sample inflation forecasts. Two Monte Carlo experiments that lend credence to our findings are also reported on.(JEL E31, C32) Copyright 2005, Oxford University Press.

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Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 43 (2005)
Issue (Month): 3 (July)
Pages: 570-585

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Handle: RePEc:oup:ecinqu:v:43:y:2005:i:3:p:570-585
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